PHOTO BY KATY RADDATZ--THE CHRONICLE
Neal Benezra will take over the directorship of the San Francisco Museum of Modern Art. He's photographed inside his office, and in front of a Sol LeWitt wall drawing (which is owned by SFMOMA).

Photo: KATY RADDATZ

PHOTO BY KATY RADDATZ--THE CHRONICLE
Neal Benezra will take over...

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SFMOMA Finances. Chronicle Graphic

SFMOMA Finances. Chronicle Graphic

SFMOMA to cut back on exhibits / Endowments frozen after losses on market

SFMOMA, which has built an international reputation in the past decade, will gradually reduce its exhibits from about 25 per year to perhaps 18 to bring its spending in line with the shrinking economy and the realities of the museum business, Director Neal Benezra told The Chronicle.

"From 1995, when the museum opened its new building, up until the last couple of years it seemed everything was possible," said Benezra, who took the helm of SFMOMA last August. "The city was bustling, donors were generous, revenue was great. . . . Now we have to get ourselves to the right size in terms of what our budget can sustain."

Benezra said that in addition to cutting the number of exhibitions, the museum will feature fewer expensive traveling exhibits and more "homegrown" shows that highlight the museum's hugely expanded collection and those of the Bay Area's many art collectors.

"That's a creative decision, not just a fiscal one," said Benezra. "It saves us a lot of money, but it's also the right thing to do. There's no point in collecting all this great material if you're not going to show it."

While its managers say SFMOMA has cash to keep its operations running and has thus far made only modest cuts, the museum's most recent financial report shows it ending the 2002 fiscal year with nearly a $10 million cumulative operating deficit -- part of which is due to losses in its endowment fund.

CASH IN THE BANK

"I don't see an immediate crisis here, they have cash in the bank," said Maryland Certified Public Accountant Richard Larkin, who has written several books on nonprofit accounting. "The fact that they're $10 million in the hole is certainly of concern. The question is where do they go from here?"

Larkin was one of two national accounting experts who reviewed the museum's financial reports for The Chronicle.

Museums and arts organizations around the country are facing similar financial woes. The current economic slump forced both New York's Guggenheim Museum and the Los Angeles County Museum of Art to scrap multimillion-dollar plans for new buildings. New York's Museum of Modern Art cut its hours and the Whitney Museum chopped exhibits and staff. Locally, San Francisco Opera has had to downsize its schedule, and Ballet San Jose Silicon Valley is struggling to survive.

But the crash that followed the Bay Area's dot-com boom dealt the San Francisco's newly expanded Museum of Modern Art a painful double blow: The institution's permanent endowment, now valued at $83 million, suffered a $27 million stock market loss in two years, according financial statements -- putting it nearly $14 million below the threshold required by donor restrictions, a level state accounting laws require it to maintain.

When it raised the money -- back when the stock market was at its peak -- it promised donors it would maintain their original contributions and spend only the investment gains. Then it saw vast sums of that money disappear when the stock market dipped.

DAILY REVENUES DROP

At the same time, a drop in tourism, facilities rentals and bookstore spending has sapped the museum's daily revenues.

Attendance has dropped 13 percent, since it hit its peak of 736,000 visitors in 1999. But Benezra said there has been an even larger drop-off in the number of ticket-buying tourists, usually a big source of revenue for the museum, while members, who don't spend as much money, have continued to swarm to the shows.

Up until this year, the museum had planned to run deficits of several hundred thousand dollars a year for three years -- totaling $4.5 million. Investment gains earned by the endowment were supposed to cover those costs.

Instead the endowment has lost money and, this year the museum faces an unexpected deficit of more than $1 million, said Katie Koch, deputy director of administration and finance.

"We had a forecast; we were following our strategic plan and the economy fell out from under us," said Koch.

According to accounting experts, the financial quandary the museum now faces is caused -- at least in part -- by oddities in accounting rules and stock market conditions that have affected everyone.

"It's a sad story," said Geralyne Mahoney, who heads the nonprofit accounting unit of the San Francisco firm Burr Pilger and Mayer. "It's a story of how you can do what is supposedly right and still suffer from it."

It's been apparent for years that the museum couldn't sustain its current level of operations with the money it had, said Brooks Walker Jr., a museum trustee and a chairman of its finance committee. That, he said, was the impetus behind the institution's parting ways with former director, David Ross,

who resigned in 2001. After that, the board hired Benezra and charged him with getting a tighter grip on the finances.

But even before that personnel change, the board attempted to deal with the museum's long-term financial imbalances by generating a huge endowment, Walker said. Starting in 1999, it raised more than $60 million, mostly from its own board members, who include such local financial powerhouses as Donald Fisher of the Gap, venture capitalist Arthur Rock and Helen Schwab, wife of stockbroker Charles Schwab.

"I think it was rational. It wasn't just shutting our eyes and hoping things would get better," said Walker, who said the board invested the funds aggressively in the bull market, placing about two-thirds of its reserves in stocks. In retrospect, he said, "it looks like a mistake to put as much money as we did in the stock market."

Mahoney said it was not outside the norm for a nonprofit to have 65 to 70 percent of its permanent reserves in the stock market, but Walker chided that, had the board been "brilliant," it would have put the money in gold or bonds --

or even a shoe box.

Like the museum, numerous organizations with endowments raised when the market was high have seen the value of their investments drop below the level they had promised donors they would maintain, accountants said, but in most cases the resulting shortfalls are much smaller than SFMOMA's.

"It's not a scenario where someone is going handcuff them and take them to jail," said Mahoney. "No one could say they're doing bad business here. But they really need the stock market to come back."

Attorney Belinda Johns, who heads the charities division of the California attorney general's office, said that while her office does prosecute nonprofits that make imprudent, risky investments, it has no intention of going after nonprofits unwittingly caught up in the same stock market decline that has hit all investors.

"That's something we would normally leave for the (nonprofit's) board to deal with," Johns said.

Walker said SFMOMA is planning to hold on to its investments and hope the market revives. But, until the losses are made up, the endowment is essentially frozen. The museum, which had been getting $2 million to $3 million from the endowment every year to support its daily operations, can no longer draw any money from the fund.

To cushion the museum from this blow, the board went to several donors and asked them to reclassify $15 million in contributions they had made to the permanent endowment as money that could be spent, Walker said. For the next several years that money will be used to substitute for money that can't come from the frozen endowment.

"In effect what they've done is taken money from the future to use in the present," said Larkin.

Walker acknowledged that the endowment is no longer nearly as large as the board intended it to be.

"I don't think this is the time to try to raise more money," he said.

Retired entrepreneur Kent Logan, a Colorado art collector who has donated both art and endowment funds to the museum, said the museum shouldn't be held responsible for the wild gyrations of the stock market.

"There's no donor that's going to hold their feet to the fire over this," he said.

Logan, whose wife Vicki sits on the museum's board, said the institution had already put the museum on the right financial course when it replaced Ross and demanded tighter control of the organizations' finances.

But he said the institution -- and other art museums around the nation -- will need to make major strategic shifts to deal with the economic future.

"The easy decisions have been made; the obvious cuts have been done," he said. "You can't keep going in a mode where you're constantly in a deficit."